David Rosenthal: belief

Transcript context

…Another big one is this concept that you should trade on a secret that others are not trading on. On the face of it, it seems obvious. Of course I should come up with some strategy to trade on that other people aren’t trading on. But I said a couple of words there, which is ‘of course I should come up with.’ Therein lies the fallacy. I think most investment firms try to get their ideas out of people, and then do an incredibly rigorous amount of data analysis to figure out if they should put those trades on or not. I could be wrong, but I do not think modern RenTech does that. I think all of their investment ideas come from data and come from signal processing. Therefore you are going to put trades on that make no intuitive sense. When you’re putting trades on that are profitable and make no intuitive sense, you aren’t going to have competitors. If you find a relationship between two things that a human could never come up with or dream of those relationships—and we’re saying too it end things, 10 things, 20 things, 100 things and in various different weights at various different timescales—that is a killer recipe to exploit a secret that no one else knows and be able to beat other people in the market. Such a good point. Many, if not most, of the other quant firms are not doing that. Some of them maybe, but I think most of them are the model is suggesting things, and there is a person or persons who are the master portfolio allocators that pull the trigger or don’t pull the trigger. To be super illustrative because I think your natural tendency is like, oh I can understand why these two things would be related, the relationship may not be what you figure. For example, there could be two things that always move together. Tesla stock and wheat futures. You might try to, because humans are storytellers, concoct some story in your head of why those move together, and if you believe it then you might decide there’s some date where they should stop moving together. Well it could very well be that some other big hedge fund just owns both of those things, and when they rebalance it causes those assets to move together. But you would never think of that. You would think these things have a direct relationship with each other, not just that there’s liquidity in the market from both of them at the same time because someone else owns both of them. I think what RenTech admitted is we have no idea why anything is actually connected, but it doesn’t matter.…

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